66% of respondents support financial penalties for late settlement
Market participants are not prepared for shorter settlement cycles, despite being strongly in favor of a move to T+2, according to a new study from Omgeo, the global standard for post-trade efficiency. Half of survey respondents are making no preparations for shorter settlement cycles even though 66% believe that financial penalties should be incurred for late settlement.
The study, based on a survey with responses from 590 custodian banks, broker/dealers, fund managers and other financial institutions in Asia-Pacific, North America and Europe, focuses on the industry’s readiness for shortened settlement cycles.
Tony Freeman, executive director of industry relations at Omgeo, said: “There is a global shift towards shorter settlement cycles to reduce exposure to counterparties and market prices and to achieve liquidity, capital and collateral savings. The lack of meaningful preparation is concerning as we gain increasing momentum towards shorter settlement cycles globally.”
Awareness of the case for shortening the settlement timetable is the highest in Europe (59%), which is poised to move to T+2 by mid-2014 ahead of the implementation of Target2Securities (T2S), and in Asia-Pacific (22%), where a number of markets already settle on T+2. In North America (6%), awareness of shortened settlement cycles is the lowest, with the topic only starting to re-emerge following a recent study by the Boston Consulting Group1 that estimates that it would take three years to move the US securities industry to T+2.
In terms of achieving T+2 settlement, the survey found that 60% of respondents considered the timely receipt of trade details from counterparties the most crucial determinant of success.
Commenting on this, Tony Freeman added: “Market participants clearly appreciate that their own readiness to settle trades on T+2 is only as good as that of their counterparties — hence the insistence on timely delivery of trade details. However, only 20% of respondents to the survey are educating their clients about the impact of T+2.”
1 Boston Consulting Group, Cost Benefit Analysis of Shortening the Settlement Cycle, October 2012